If you missed Sunday
afternoon CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute
version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the
occasional video clips of President Obama discussing the debt crisis. The
problem is a build up over spending for most of our nation’s history, It landed
at the feet of President Obama, but he’s certainly not the cause nor is his the
recent expansion of health care coverage the real cause.

One take home from
the CNN show was that over 60% of the booked National Debt increases are funded
off shore (largely in Asia and the Middle East).
This going to greatly constrain the global influence and economic choices of the
United States.

By 2016 the interest
payments on the National Debt will be the biggest single item in the Federal
Budget, more than national defense or social security. And an enormous portion
of this interest cash flow will be flowing to foreign nations that may begin to
put all sorts of strings on their decisions to roll over funding our National
Debt.

The unbooked entitlement obligations that are not part of the National Debt are
over $60 trillion and exploding exponentially. The Medicare D entitlements to
retirees like me added over $8 trillion of entitlements under the Bush
Presidency.

Most of the problems
are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

I thought the show
was pretty balanced from a bipartisan standpoint and from the standpoint of
possible solutions.

Many of the possible
“solutions” are really too small to really make a dent in the problem. For
example, medical costs can be reduced by one of my favorite solutions of
limiting (like they do in Texas) punitive damage recoveries in malpractice
lawsuits. However, the cost savings are a mere drop in the bucket. Another drop
in the bucket will be the achievable increased savings from decreasing medical
and disability-claim frauds. These are important solutions, but they are not
solutions that will save the USA.

The big possible
solutions to save the USA are as follows (you and I won’t particularly like
these solutions):

Extend retirement age significantly
(75 years maybe?).
When Social Security was enacted, life expectancy was slightly over 65 years
of age.
Now it is well over 75 years of age.

Hit Medicare retirees like me with
higher fees for physicians, hospital services, and Medicare D drug payments.
Perhaps this should be on a scale based upon wealth/income levels such that
people, like me, who can afford to pay more must pay more.

Greatly curb the biggest cost of
Medicare --- keeping dying people alive in expensive hospitals for a few
weeks or maybe even a few months. Sometimes dying people must be kept alive
in ICU units costing over $10,000 per day when there is no hope of recovery.
There was not any hint of suggesting euthanasia as an alternative. But dying
people can be allowed to die more naturally and pain free.
http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)

Limit the National Debt is some way.
It’s now more common in Europe to limit national debt to 60% of GDP. Various
other means of constraining our National Debt were discussed in the CNN
longer version of the IOUSA Solutions video.

Here is the original (and somewhat dated video
that does not delve into solutions very much)IOUSA (the most frightening movie in American history) --- (see a 30-minute version of the documentary at
www.iousathemovie.com )

If you missed Sunday afternoon CNN’s two-hour IOUSA
Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the
occasional video clips of President Obama discussing the debt crisis. The
problem is a build up over spending for most of our nation’s history, It landed
at the feet of President Obama, but he’s certainly not the cause nor is his the
recent expansion of health care coverage the real cause.

Watch the World Premiere
of I.O.U.S.A.: Solutions on CNN
Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

Featured Panelists
Include:

Peter G. Peterson, Founder and Chairman, Peter G. Peterson
Foundation

David Walker, President & CEO, Peter G. Peterson Foundation

Sen. Bill Bradley

Maya MacGuineas, President of the Committee for a Responsible
Federal Budget

Call it the fatal arithmetic of imperial
decline. Without radical fiscal reform, it could apply to America next.Niall Ferguson,
"An Empire at Risk: How Great Powers Fail," Newsweek MagazineCover Story, November 26, 2009 ---
http://www.newsweek.com/id/224694/page/1
Please note that this is NBC’s liberal Newsweek Magazine and not Fox News
or The Wall Street Journal.

.
. .

In other words, there
is no end in sight to the borrowing binge. Unless entitlements are cut or taxes
are raised, there will never be another balanced budget. Let's assume I live
another 30 years and follow my grandfathers to the grave at about 75. By 2039,
when I shuffle off this mortal coil, the federal debt held by the public will
have reached 91 percent of GDP, according to the CBO's extended baseline
projections. Nothing to worry about, retort -deficit-loving economists like Paul
Krugman.

.
. .

Another way of doing
this kind of exercise is to calculate the net present value of the unfunded
liabilities of the Social Security and Medicare systems. One recent estimate
puts them at about $104 trillion,
10 times the stated federal debt.

Niall Ferguson is the Laurence A. Tisch
professor of history at Harvard University and the author of The Ascent of
Money. In late 2009 he puts forth an unbooked discounted present
value liability of $104 trillion for Social Security plus Medicare. In late
2008, the former Chief Accountant of the United States Government, placed this
estimate at$43 trillion. We can hardly attribute the $104-$43=$61 trillion
difference to President Obama's first year in office. We must accordingly
attribute the $61 trillion to margin of error and most economists would
probably put a present value of unbooked (off-balance-sheet) present value of
Social Security and Medicare debt to be somewhere between $43 trillion and $107
trillion To this we must add other unbooked present value of entitlement debt
estimates which range from $13 trillion to $40 trillion. If Obamacare passes it
will add untold trillions to trillions more because our legislators are not
looking at entitlements beyond 2019.

The Meaning of "Unbooked" versus "Booked" National Debt
By "unbooked" we mean that the debt is not included in the current "booked"
National Debt of $12 trillion. The booked debt is debt of the United States for
which interest is now being paid daily at slightly under a million
dollars a minute. Cash must be raised daily for interest payments. Cash is
raised from taxes, borrowing, and/or (shudder) the current Fed approach to
simply printing money. Interest is not yet being paid on the unbooked debt for
which retirement and medical bills have not yet arrived in Washington DC for
payment. The unbooked debt is by far the most frightening because our leaders
keep adding to this debt without realizing how it may bring down the entire
American Dream to say nothing of reducing the U.S. Military to almost nothing.

This matters more for
a superpower than for a small Atlantic island for one very simple reason. As
interest payments eat into the budget, something has to give—and that something
is nearly always defense expenditure. According to the CBO, a significant
decline in the relative share of national security in the federal budget is
already baked into the cake. On the Pentagon's present plan, defense spending is
set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6
percent of GDP by 2028.

Over the longer run,
to my own estimated departure date of 2039, spending on health care rises from
16 percent to 33 percent of GDP (some of the money presumably is going to keep
me from expiring even sooner). But spending on everything other than health,
Social Security, and interest payments drops from 12 percent to 8.4 percent.

This is how empires
decline. It begins with a debt explosion.
It ends with an inexorable reduction in the resources available for the Army,
Navy, and Air Force. Which is why voters are right to worry about America's debt
crisis. According to a recent Rasmussen report, 42 percent of Americans now say
that cutting the deficit in half by the end of the president's first term should
be the administration's most important task—significantly more than the 24
percent who see health-care reform as the No. 1 priority. But cutting the
deficit in half is simply not enough. If the United States doesn't come up soon
with a credible plan to restore the federal budget to balance over the next five
to 10 years, the danger is very real that a debt crisis could lead to a major
weakening of American power.

My sentiments on immigration are expressed by the
welcoming words of poet Emma Lazarus' that grace the base of our Statue of
Liberty: "Give me your tired, your poor, your huddled masses yearning to
breathe free." Those sentiments are probably shared by most Americans and
for sure by my libertarian fellow travelers, but their vision of immigration
has some blind spots. This has become painfully obvious in the wake
Arizona's law that cracks down on illegal immigration. Let's look at the
immigration issue step by step.

There are close to 7 billion people on our planet.
I'd like to know how the libertarians answer this question: Does each
individual on the planet have a natural or God-given right to live in the
U.S.? Unless one wishes to obfuscate, I believe that a yes or no can be
given to that question just as a yes or no answer can be given to the
question whether Williams has a right to live in the U.S.

I believe most people, even my open-borders
libertarian friends, would not say that everyone on the planet had a right
to live in the U.S. That being the case suggests there will be conditions
that a person must meet to live in the U.S. Then the question emerges: Who
gets to set those conditions? Should it be the United Nations, the European
Union, the Japanese Diet or the Moscow City Duma? I can't be absolutely
sure, but I believe that most Americans would recoil at the suggestion that
somebody other than Americans should be allowed to set the conditions for
people to live in the U.S.

What those conditions should be is one thing and
whether a person has a right to ignore them is another. People become
illegal immigrants in one of three ways: entering without authorization or
inspection, staying beyond the authorized period after legal entry or by
violating the terms of legal entry. Most of those who risk prosecution under
Arizona's new law fit the first category -- entering without authorization
or inspection.

Probably, the overwhelming majority of Mexican
illegal immigrants are hardworking, honest and otherwise law-abiding members
of the communities in which they reside. It would surely be a
heart-wrenching scenario for such a person to be stopped for a driving
infraction, have his illegal immigrant status discovered and face
deportation proceedings. Regardless of the hardship suffered, being in the
U.S. without authorization is a crime.

When crimes are committed, what should be done?
Some people recommend amnesia, which turns out to be the root word for
amnesty. But surely they don't propose it as a general response to crime
where criminals confess their crime, pay some fine and apply to have their
crimes overlooked. Amnesty supporters probably wish amnesty to apply to only
illegal immigrants. That being the case, one wonders whether they wish it to
apply to illegals past, present and future, regardless of race, ethnicity or
country of origin.

Various estimates put the illegal immigrant
population in the U.S. between 10 and 20 million. One argument says we can't
round up and deport all those people. That argument differs little from one
that says since we can't catch every burglar, we should grant burglars
amnesty. Catching and imprisoning some burglars sends a message to would-be
burglars that there might be a price to pay. Similarly, imprisoning some
illegal immigrants and then deporting them after their sentences were served
would send a signal to others who are here illegally or who are
contemplating illegal entry that there's a price to pay.

Here's Williams' suggestion in a nutshell. Start
strict enforcement of immigration law, as Arizona has begun. Strictly
enforce border security. Most importantly, modernize and streamline our
cumbersome immigration laws so that people can more easily migrate to our
country.

The bill, called the American Power Act, is
designed to reduce greenhouse gas emissions and lay out a national energy
strategy. Last year Congress seemed to be moving quickly on passing a
climate and energy bill after the House passed such a bill in June, but
Senate versions stalled. It's not clear when the Senate will officially take
up the new bill, which was put together with the help of Lindsey Graham
(R-SC), who recently withdrew his support. Meanwhile, the EPA is drawing up
regulations for controlling greenhouse-gas emissions that could go into
effect in January if Congress fails to pass a climate bill.

The new bill seeks to reduce greenhouse gas
emissions by 17 percent as of 2020 and by 83 percent by 2050, compared to
2005 levels, by limiting the amount that major emitters can release into the
atmosphere. These limits will be enforced via a type of cap-and-trade
system. This would require utilities, and eventually heavy industry and
refiners, to obtain allowances for emissions, some of which will be given
out, and some sold. Companies can decide to either reduce emissions or buy
enough allowances to cover their emissions. The allowances can also be
traded between emitters. Some of the proceeds from purchasing allowances
will go to pay down the federal government deficit, some will go directly to
consumers in the form of rebates, and some will fund programs to encourage
the development of new technologies.

The bill includes incentives for nuclear power,
natural-gas vehicles, and carbon-dioxide capture and storage technology,
which would be most useful for coal power plants. It funds R&D for renewable
energy and advanced vehicles, and includes a variety of measures to help
decrease petroleum consumption. It includes incentives for offshore
drilling, but states that could be affected by oil spills can veto projects.

Unlike the bill passed by the House last year, the
Senate bill does not require utilities to use renewable energy, but such
provisions exist in a separate energy bill sponsored by Sen. Jeff Bingaman
(D-NM), and they could eventually be incorporated into the new bill. Another
key difference with the new bill is the introduction of the rebate program
for consumers that will offset the costs of the bill.

President Barack Obama's blue-ribbon fiscal
commission began its work on a somber note last month. "Anything we
eventually do in any way will be met by howls of anguish," said the
commission's co-chair, former Republican Sen. Alan Simpson. "The debt is
like a cancer that will destroy the country from within," said his co-chair,
former Clinton White House Chief of Staff Erskine Bowles.

If the commission wants a more positive note the
next time it meets, it should take a look at the $1 trillion opportunity
that resides in comprehensive bureaucratic reform. Not only is the rate of
return high, the reforms are well within reach and long overdue.

The savings will not be found in hiring freezes and
pay cuts—which inevitably lead to backdoor pay increases through promotions
and title creep—but in streamlining the government's antiquated systems,
duplicative programs, and needlessly dense organization chart. Consider the
following rough estimates of the possible 10-year savings:

• Save $1 billion by cutting the number of
presidential appointees. Sens. Russ Feingold (D., Wis.) and John McCain
(R., Ariz.) have already introduced a proposal to cut the number of
appointments to 2,000 from 3,000, but cutting the number by half to
1,500 would make a bigger contribution in both dollars and clarity of
command. Add in the savings from improving the government's ability to
connect the dots and move appointees into office faster, and the total
might reach $100 billion in improved performance

• Save $100 billion by eliminating needless
management layers throughout the bloated federal hierarchy. The
flattening of government should not be restricted to the political class
at the top. It should also target the middle and lower-level managers
who strangle information as it flows upward at agencies such as the
Federal Bureau of Investigation, where early clues to the September 11
terrorist attacks were never advanced.

• Save $200 billion by eliminating many of the
federal jobs about to be vacated by the baby boomers. It will be
tempting to fill the roughly half million jobs with the next federal
employee in line but many of the posts were created by automatic
promotions as the baby boomers aged. There are only two ways to know
whether the jobs are needed. The first is to examine each job as it is
exited and make a deliberate decision to fill it. The default should be
no.

The second is to leave the job open for six months
and see if the work is done faster with fewer hands. Either way, the federal
government's mid-level work force will likely become smaller at least until
the evaluations are completed. Of course, great care will need to be taken
to protect government's essential roles in research, regulation and law
enforcement.

• Save $200 billion by cutting the contracting
work force. The federal government is not the only employer where
padding has occurred. The Obama administration is already planning on
capturing nearly $40 billion in contractor waste through tighter
contracts on so-called indefinite quantity agreements. A parallel cut in
the number of contract employees could capture much more. The Obama
administration should also prohibit the use of contractors as de facto
civil servants. Too many are hired from outside government because the
hiring and disciplinary process within government is broken.

• Save $100 billion by increasing federal
productivity. Federal employees have some of the most important jobs in
the world, but many do not have the basic materials needed for a
high-productivity era. Relatively small investments in integrated
information technology that allows agencies to communicate with each
other could generate huge productivity savings across government.

So could the elimination of the federal
government's antiquated regional office structure, which is a bastion of
micromanagement, costly overhead, and needless dead-ends on information and
decisions.

• Save $300 billion by merging duplicative
programs. Duplication produces more than confusion for lower-level
employees and government beneficiaries. It also creates wasteful
spending through multiple accounting, oversight and processing systems.
The federal government could save enormous overhead by consolidating the
"back office" operations in high-volume agencies such as the Social
Security Administration, which has an impressively low administrative
cost per case.

• Save $200 billion by eliminating programs
that either do not produce results or are too trivial to save. Alexander
Hamilton wrote that government should only be involved in "extensive and
arduous enterprise for the public benefit." Using that metric, one can
easily assemble a long list of programs that should be dropped from the
statute books, such as agricultural price supports, a sacred cow that
does little to create public benefit.

Although the back-of-the-envelope savings add up to
more than $1.1 trillion over 10 years, some of the savings would have to be
spent on new technologies, buy-out packages, and accelerated training as the
federal work force adjusts to its new shape. It costs money to save money.
Even if Congress and the president set aside $100 billion for productivity
investments, taxpayers would still reap $1 trillion in potential savings.

It is not clear how the Congressional Budget Office
or the Office of Management and Budget would score these ideas. Both long
ago lost their capacity to monitor administrative costs. Nor is it clear
that federal employment would fall. The federal government still needs more
workers at the bottom of the hierarchy where its goods and services such as
veterans care are delivered and laws are enforced. It is entirely possible
that the number of midlevel jobs could fall by 300,000 even as the number of
front-line jobs rises by the same number, albeit at a much lower cost per
hire.

What is clear is that the federal government is
long overdue for comprehensive reform. It's been nearly 60 years since
Herbert Hoover led the last streamlining effort. During that time, our
federal bureaucracy has steadily thickened with reporting chains to nowhere,
micromanagement, ineffective accounting systems, and needless red tape.
There are dollars to be found in another government-wide review.

If the fiscal commission wants to delegate this
work, George H.W. Bush would be the perfect former president to lead the
effort. Mr. Bush made total quality management the centerpiece of his
abbreviated management agenda, and he was always interested in good
government. Mr. Bush would need full authority to put every bureaucratic
process on the table, including the hopelessly sluggish presidential
appointments process, the antiquated civil-service system, and the
anachronistic federal organization chart.

Yet even if comprehensive reform does not save a
dime, the nation deserves a faster, more responsive government. The federal
government needs the right employees in the right programs with the right
resources to honor the promises being made today. If doing so saves $1
trillion or so, all the better.

Mr. Light is a professor at New York University's Robert F. Wagner
School of Public Service and the author of "A Government Ill Executed: The
Decline of the Federal Service and How to Reverse It" (Harvard University
Press, 2009).

A Senate campaign is not a libertarian seminar, a
lesson that Kentucky Republican Rand Paul has learned the hard way since his
primary victory on Tuesday. He has now renounced the doubts he expressed
last week about some parts of the Civil Rights Act of 1964 and has declared
the matter closed. But before we move on, it's important to understand why
Mr. Paul was wrong even on his own libertarian terms.

In his acceptance remarks on Tuesday night, Mr.
Paul sounded mainstream conservative themes on spending, taxes and the
reckless expansion of state power. But in his first brush with national
scrutiny, the eye doctor let himself be drawn into a debate over the
landmark 46-year-old law. Some conservatives want to blame liberal
journalists for asking the questions, but Mr. Paul agreed to appear on
MSNBC, and such queries were predictable given the liberal stereotype that
all conservatives are secretly racists.

Mr. Paul then handed his opponents a sword by
saying that while he favored the civil rights statute's ban on public
discrimination, he thought it was mistaken to prohibit private bias. Asked
if a restaurant should be able to refuse service to blacks, Mr. Paul was at
first evasive but eventually replied, "Yes."

Even if Mr. Paul was speaking out of a principled
belief in the rights of voluntary association, he was wrong on the
Constitutional and historic merits. The Civil Rights Act of 1964—and its
companion laws, such as the Voting Rights Act of 1965—were designed to
address abuses of state and local government power. The Jim Crow laws that
sprang up in the South after Reconstruction and prevailed for nearly a
century were not merely the result of voluntary association.
Discrimination—public and private—was enforced by police power and often by
violence.

In parts of the mid-20th-century South, black men
were lynched, fire hoses and vicious dogs were turned on children, and
churches were bombed with worshippers inside. By some accounts, two-thirds
of the Birmingham, Alabama, police force in the early 1960s belonged to the
Ku Klux Klan. State and local government officials simply refused to
acknowledge the civil rights of blacks and had no intention of doing so
unless outside power was brought to bear.

The federal laws of that era were necessary and
legal interventions to remedy the unconstitutional infringement on
individual rights by state and local governments. On Thursday Mr. Paul
finally acknowledged this point when he told CNN, "I think there was an
overriding problem in the South so big that it did require federal
intervention."

One tragedy of that era is that the frequent use of
"states rights" arguments to defend Jim Crow discredited those arguments for
decades and eased the way for federal intrusions on state power that really
are unconstitutional. ObamaCare would be exhibit A. By giving his opponents
an opening to portray him and his tea party supporters as racial
revanchists, Mr. Paul has let them change the campaign subject from the
Obama Administration's willy-nilly expansion of the corporate state. He owes
his supporters, and his own libertarian principles, better than that.

Many of us view Nobel Laureate and Princeton
University's left of liberal Economics Professor Paul Krugan's incessant
encouragements for unrestrained deficit spending and adding trillions more to
the National Debt as irresponsible to say the least.

Finance Professor Jim Mahar clued me to the link
below. Jim claims that Krugman's case is unimpressive for a supposed scholar. I
think Jim's correct.
I also think Krugman is a really, really, really dangerous nut case contributing
to the implosion of the debt-ridden U.S. economy.

It’s an ill wind that
blows nobody good, and the crisis in Greece is making some people — people
who opposed health care reform and are itching for an excuse to dismantle
Social Security — very, very happy. Everywhere you look there are editorials
and commentaries, some posing as objective reporting, asserting that Greece
today will be America tomorrow unless we abandon all that nonsense about
taking care of those in need.

The truth, however, is that
America isn’t Greece — and, in any case, the message from Greece isn’t what
these people would have you believe.

So, how do America and
Greece compare?

Both nations have lately
been running large budget deficits, roughly comparable as a percentage of
G.D.P. Markets, however, treat them very differently: The interest rate on
Greek government bonds is more than twice the rate on U.S. bonds, because
investors see a high risk that Greece will eventually default on its debt,
while seeing virtually no risk that America will do the same. Why?

One answer is that we have a
much lower level of debt — the amount we already owe, as opposed to new
borrowing — relative to G.D.P. True, our debt should have been even lower.
We’d be better positioned to deal with the current emergency if so much
money hadn’t been squandered on tax cuts for the rich and an unfunded war.
But we still entered the crisis in much better shape than the Greeks.

Even more important,
however, is the fact that we have a clear path to economic recovery, while
Greece doesn’t.

The U.S. economy has been
growing since last summer, thanks to fiscal stimulus and expansionary
policies by the Federal Reserve. I wish that growth were faster; still, it’s
finally producing job gains — and it’s also showing up in revenues. Right
now we’re on track to match Congressional Budget Office projections of a
substantial rise in tax receipts. Put those projections together with the
Obama administration’s policies, and they imply a sharp fall in the budget
deficit over the next few years.

Greece, on the other hand,
is caught in a trap. During the good years, when capital was flooding in,
Greek costs and prices got far out of line with the rest of Europe. If
Greece still had its own currency, it could restore competitiveness through
devaluation. But since it doesn’t, and since leaving the euro is still
considered unthinkable, Greece faces years of grinding deflation and low or
zero economic growth. So the only way to reduce deficits is through savage
budget cuts, and investors are skeptical about whether those cuts will
actually happen.

It’s worth noting, by the
way, that Britain — which is in worse fiscal shape than we are, but which,
unlike Greece, hasn’t adopted the euro — remains able to borrow at fairly
low interest rates. Having your own currency, it seems, makes a big
difference.

In short, we’re not Greece.
We may currently be running deficits of comparable size, but our economic
position — and, as a result, our fiscal outlook — is vastly better.

That said, we do have a
long-run budget problem. But what’s the root of that problem? “We demand
more than we’re willing to pay for,” is the usual line. Yet that line is
deeply misleading.

First of all, who is this
“we” of whom people speak? Bear in mind that the drive to cut taxes largely
benefited a small minority of Americans: 39 percent of the benefits of
making the Bush tax cuts permanent would go to the richest 1 percent of the
population.

And bear in mind, also, that
taxes have lagged behind spending partly thanks to a deliberate political
strategy, that of “starve the beast”: conservatives have deliberately
deprived the government of revenue in an attempt to force the spending cuts
they now insist are necessary.

Meanwhile, when you look
under the hood of those troubling long-run budget projections, you discover
that they’re not driven by some generalized problem of overspending.
Instead, they largely reflect just one thing: the assumption that health
care costs will rise in the future as they have in the past. This tells us
that the key to our fiscal future is improving the efficiency of our health
care system — which is, you may recall, something the Obama administration
has been trying to do, even as many of the same people now warning about the
evils of deficits cried “Death panels!”

So here’s the reality:
America’s fiscal outlook over the next few years isn’t bad. We do have a
serious long-run budget problem, which will have to be resolved with a
combination of health care reform and other measures, probably including a
moderate rise in taxes. But we should ignore those who pretend to be
concerned with fiscal responsibility, but whose real goal is to dismantle
the welfare state — and are trying to use crises elsewhere to frighten us
into giving them what they want

The American public feels it is drowning in red
ink. It is dismayed and even outraged at the burgeoning national deficits,
unbalanced state and local budgets, and accounting that often masks the
extent of indebtedness. There is a mounting sense that taxpayers are being
taken for an expensive ride by public-sector unions. The extraordinary
benefits the unions have secured for their members are going to be harder
and harder to pay.

The political backlash has energized the tea party
activists, put incumbents at risk in both parties, and already elected
fiscal conservatives such as Republican Gov. Chris Christie of New Jersey.
Over the next fiscal year, the states are looking at deficits approaching
hundreds of billions of dollars. The Center on Budget and Policy Priorities,
a liberal think tank, estimates that this coming year alone states will face
an aggregate shortfall of $180 billion. In some states the budget gap is
more than 30%.

How did we get into such a mess? States have always
had to cope with volatility in the size and composition of their
populations. Now we have shrinking tax bases caused by recession and extra
costs imposed on states to pay for Medicaid in the federal health-care
program. The straw (well, more like an iron beam) that breaks the camel's
back is the unfunded portions of state pension plans, health care and other
retirement benefits promised to public-sector employees. And federal
government assistance to states is falling—down by roughly half in the next
fiscal year beginning Oct. 1.

It is galling for private-sector workers to see so
many public-sector workers thriving because of the power their unions
exercise. Take California. Investigative journalist Steve Malanga points out
in the City Journal that California's schoolteachers are the nation's
highest paid; its prison guards can make six-figure salaries; many state
workers retire at 55 with pensions that are higher than the base pay they
got most of their working lives.

All this when California endures an unemployment
rate steeper than the nation's. It will get worse. There's an exodus of
firms that want to escape California's high taxes, stifling regulations, and
recurring budget crises. When Cisco CEO John Chambers says he will not build
any more facilities in California you know the state is in trouble.

The business community and a growing portion of the
public now understand the dynamics that discriminate against the private
sector. Public unions organize voting campaigns for politicians who, on
election, repay their benefactors by approving salaries and benefits for the
public sector, irrespective of whether they are sustainable. And what is
happening in California is happening in slower motion in the rest of the
country. It's no doubt one of the reasons the Pew Research Center this year
reported that support for labor unions generally has plummeted "amid growing
public skepticism about unions' power and purpose."

In New York, public-service employees have received
gold-plated perks for much of the 20th century, especially generous
health-insurance benefits. Indeed, where once salaries were lower in the
public sector, the salary gaps in the public and private sectors have
disappeared or even reversed.

A Citizens Budget Commission report in 2005 showed
that for most job categories in the greater New York City region,
public-sector workers received higher hourly wages than private-sector
workers. And according to a 2009 survey by the same group, this doesn't even
count the money that New York City pays in full premiums for comprehensive
health-insurance policies for workers and their families. Only 8% of workers
in private firms enjoy that subsidy. In virtually all cases, the city also
pays the full health-care premium costs for retirees and their spouses. And
city pensions are "defined benefit" plans, which are more expensive since
they guarantee specific benefits on retirement.

By contrast, private-sector workers in the survey
were mostly in "defined contribution" plans, which means that, unlike their
cushioned brethren in the public sector, they do not have a predetermined
benefit at retirement. If New York City were to require its current workers
to pay contributions toward health insurance equal to the amounts paid by
the employees of local private-sector firms, the taxpayer savings would be
$628 million a year. In New Jersey, Gov. Christie says government employee
health benefits are 41% more expensive than those of the average Fortune 500
company.

What we suffer is a ruinously expensive
collaboration between elected officials and unionized state and local
workers, purchased with taxpayer money. "Scratch my back and I'll scratch
yours."

No wonder the Service Employees International Union
has become the nation's fastest-growing union: It represents government and
health-care workers. Half of its 700,000 California members are government
employees. More and more, it wins not on the picket line but at the
negotiating table, where it backs up traditional strong-arming with
political power. It spends vast amounts of money on initiatives that keep
the government growing and the gravy flowing.

The state's teachers unions operate in a similar
fashion—with the result that California's various municipalities, especially
Los Angeles, face budget shortfalls in the hundreds of millions of dollars.
California can no longer rely on a strong economy to support this
munificence. Its unemployment rate of 12.5% runs several points higher than
the national rate and its high-tech companies are choosing to expand
elsewhere. Why stay in a state with such higher taxes and a cumbersome
regulatory environment?

California is a horrible warning of how dreams can
turn to dust. In most states, politicians face a contracting local economy
and shortfalls in tax receipts. Naturally, they look to cut expenses but run
into obstruction from politically powerful unions that represent state and
local government employees, teachers and health-care workers who have
themselves caused pension and health-care insurance costs to soar. It is not
an accident that in framing the national stimulus program in 2009 Congress
directed a stunning $275 billion of the $787 billion as grants to the states
to support public-service employees in health care, education, etc.

The lopsided subsidies for pension and health costs
are a large part of the fiscal crises at the state and local levels. The
subsequent squeeze on education and infrastructure investment is undermining
the very programs that have made it possible for our economy to grow.

Between New York and California, the projected
deficits run about $40 billion—and that doesn't account for projected
billions of dollars in the operating deficits in the states' mass transit
systems or the multibillion-dollar unfunded liability in many of the state
pension plans. New York would be badly hit because it is on the verge of
being deprived of tax revenues by Washington's increased regulations on the
financial industry, especially the hugely profitable, multitrillion-dollar
market in derivatives—an industry that is critical to the economy of New
York state and the country.

City government was developed to serve its
citizens. Today the citizenry is working in large part to serve the
government. It is always hard to shrink government spending. It is
particularly difficult when public-sector unions have such a unique lever of
pressure.

We have to escape this cycle or it will crush us.
One way is to take labor negotiations out of the hands of vulnerable
legislators and assign them to independent commissions. They would have a
better shot at achieving a fair balance between appropriate salary increases
and the revenues and services of local municipalities. The electorate won't
swallow any more red ink.

Mr. Zuckerman is chairman and editor in chief of U.S. News & World
Report.

A proposed climate bill
unveiled last week by senators John Kerry (D-MA) and Joe Lieberman
(I-CT) is getting the support of some economists and utilities as a
relatively inexpensive way to reduce carbon-dioxide emissions that will
initially have almost no impact on electricity prices. The supporters,
however, worry that the legislation won't be passed, which would open the
way for far more expensive regulations from the U.S. Environmental
Protection Agency (EPA).

Last week California Governor Arnold Schwarzenegger
said revised budget numbers show the state is now $19 billion in debt. Say
what? This is like a Hollywood horror story that has a new sequel every six
months. The income and sales tax increases enacted last year were supposed
to stanch the red ink, but the debt keeps rising.

Mr. Schwarzenegger said that the "budget process is
broken" -- no kidding -- and that the state now faces a "Sophie's Choice" of
bad and worse options. His new budget calls for the elimination of whole
programs and large reductions in health and welfare services.

Democrat Darrell Steinberg, the senate president,
called the proposals a "non-starter" and said he was "disappointed that the
governor has chosen to surrender." Democrats hope to wait out the crisis
until lame duck Arnold is gone from office in seven months, but by then
California might be Greece. The state already has the worst bond rating in
the country.

Everyone knows that a main source of these fiscal
woes is pension obligations, yet Democrats continue to resist substantive
reform. "The cost of employee retirement benefits this year is $6.1
billion," said Mr. Schwarzenegger. "That is more than what it would cost to
keep [the welfare-to-work program] CalWorks, child care, mental health
services and in-home supportive services."

Mr. Steinberg wants the governor to agree to
another income tax increase on the rich, even though California currently
has one of the highest tax rates in the U.S. This is a state that IRS
statistics indicate has lost some $10 billion in wealth from out-migration
in the past five years. Another tax hike won't help to reverse that trend.
"The Democrats in Sacramento don't get it," says Republican Congressman
Darrel Issa. "Our high tax rates are driving this state off a financial
cliff."

SUMMARY: This
opinion page piece by the head of research at H.C. Wainwright & Co.
Economics highlights the relationship between tax revenues to the U.S.
government and Gross Domestic Product (GDP). The ratio has never exceeded
20%, and has fallen very close to that mark since 1945 or so, regardless of
enacted tax rates. Mr. Ranson emphasizes that this relationship exists
because the economy is "a living economic system that makes its own
collective choices" in which high-income earners will seek out "ambiguities
and loopholes" that apparently tend to maintain this relationship. He
recommends that this relationship be considered when forecasting tax
receipts based on increases in future tax rates which are prone to
over-predict revenue under conventional forecasting methods and that
"current projections of federal revenue are...unrealistically high."

CLASSROOM APPLICATION: This
article is an excellent one to use in introducing governmental accounting
topics in setting budgets and forecasting revenues. It also might be used to
discuss the policy implications of setting tax rates in a tax class.

QUESTIONS:
1. (Introductory)
What is the historical relationship between tax revenues to the federal
government and gross domestic product (GDP)? In your answer, define each of
these terms.

2. (Introductory)
According to the article, who first introduced this relationship analysis by
publishing it in the Wall Street Journal? Who is now reviewing that
relationship in this opinion page piece?

3. (Advanced)
What is the reasoning offered in the article for the consistency of the
relationship between tax revenues and GDP?

4. (Advanced)
How should this relationship be used by the federal government in
establishing a budget? In your answer, define the concept of forecasted
revenues and budget deficit.

5. (Introductory)
What does the author believe is the current issue with the U.S. federal
government's forecast of its budget deficit?

The Greeks have always been trendsetters for the
West. Washington has repudiated two centuries of U.S. fiscal prudence as
prescribed by the Founding Fathers in favor of the modern Greek model of
debt, dependency, devaluation and default. Prospects for restraining runaway
U.S. debt are even poorer than they appear.

U.S. fiscal policy has been going in the wrong
direction for a very long time. But this year the U.S. government declined
to lay out any plan to balance its budget ever again. Based on President
Obama's fiscal 2011 budget, the Congressional Budget Office (CBO) estimates
a deficit that starts at 10.3% of GDP in 2010. It is projected to narrow as
the economy recovers but will still be 5.6% in 2020. As a result the net
national debt (debt held by the public) will more than double to 90% by 2020
from 40% in 2008. The current Greek deficit is now thought to be 13.6% of a
far smaller GDP. Unlike ours, the Greek insolvency is not too large for an
international rescue.

As sobering as the U.S. debt estimates are, they
are incomplete and optimistic. They do not include deficit spending
resulting from the new health-insurance legislation. The revenue numbers
rely on increased tax rates beginning next year resulting from the scheduled
expiration of the Bush tax cuts. And, as usual, they ignore the unfunded
liabilities of social insurance programs, even though these benefits are
officially recognized as "mandatory spending" when the time comes to pay
them out.

The feds assume a relationship between the economy
and tax revenue that is divorced from reality. Six decades of history have
established one far-reaching fact that needs to be built into fiscal
calculations: Increases in federal tax rates, particularly if targeted at
the higher brackets, produce no additional revenue. For politicians this is
truly an inconvenient truth.

The nearby chart shows how tax revenue has grown
over the past eight decades along with the size of the economy. It
illustrates the empirical relationship first introduced on this page 20
years ago by the Hoover Institution's W. Kurt Hauser—a close proportionality
between revenue and GDP since World War II, despite big changes in marginal
tax rates in both directions. "Hauser's Law," as I call this formula,
reveals a kind of capacity ceiling for federal tax receipts at about 19% of
GDP.

What's the origin of this limit beyond which it is
impossible to extract any more revenue from tax payers? The tax base is not
something that the government can kick around at will. It represents a
living economic system that makes its own collective choices. In a tax code
of 70,000 pages there are innumerable ways for high-income earners to seek
out and use ambiguities and loopholes. The more they are incentivized to
make an effort to game the system, the less the federal government will get
to collect. That would explain why, as Mr. Hauser has shown, conventional
methods of forecasting tax receipts from increases in future tax rates are
prone to over-predict revenue.

For budget planning it's wiser and safer to assume
that tax receipts will remain at a historically realistic ratio to GDP no
matter how tax rates are manipulated. That leads me to conclude that current
projections of federal revenue are, once again, unrealistically high.